USD/CAD has dropped recently due to a weaker US Dollar and mixed data on Canadian inflation. The current exchange rate is about 1.3878, down 0.27%. Statistics Canada reported a 0.2% decrease in the Consumer Price Index (CPI) for December, while a decline of 0.3% was expected. Yearly inflation is now at 2.4%. The core CPI from the Bank of Canada fell by 0.4% month-over-month, with an annual decrease to 2.8%. These monthly figures suggest inflation is easing, but annual rates are still above the 2% target. This indicates the Bank of Canada may keep interest rates stable for the time being.

The Impact Of US Tariff Threats

In the US, the Dollar is weaker due to renewed tariff threats from President Trump, leading to a decline in the Dollar Index toward 99.00. Steady oil prices are giving some support to the Canadian Dollar, with West Texas Intermediate at about $59.15. Traders are watching for upcoming data and events, including the Bank of Canada’s Business Outlook Survey and various US economic reports. Please remember that the information here is for general purposes and should not be seen as investment advice. Always do further research before making financial decisions. Reflecting on early 2025, USD/CAD was around 1.3878 as markets responded to mixed Canadian inflation and a weaker US dollar. At that time, the Bank of Canada was holding rates, monitoring an annual CPI of 2.4% and a core rate of 2.8%. US tariff threats were significantly affecting the US dollar. As of today, January 19, 2026, the situation has changed dramatically, with USD/CAD now much lower at around 1.3350. Recent data from Statistics Canada shows that annual inflation has eased to 2.1%, prompting the Bank of Canada to start reducing rates, now down to 4.00%. This is a sharp contrast to the previous year’s wait-and-see approach.

Central Bank Policy Divergence

The US dollar’s driving force has shifted from politics to interest rate differences. The US Dollar Index (DXY) is now stronger, near 103.50, with the Federal Reserve’s policy rate at 4.50%, higher than Canada’s. This difference in central bank policies is a key focus, providing strong support for the US dollar. Additionally, the support for the Canadian dollar from oil prices has grown significantly. West Texas Intermediate (WTI) crude is now trading around $78 per barrel, a big increase from $59 in early 2025. This strong performance of oil helps the Canadian dollar offset the widening interest rate gap with the US. Given these changes, we should consider strategies that anticipate a potential floor in USD/CAD followed by a gradual increase. As the Bank of Canada is likely to continue cutting rates before the Federal Reserve, the interest rate gap may favor the US dollar in the medium term. To manage potential volatility, looking at call options on USD/CAD might be advisable to position for a rebound driven by this policy divergence. Create your live VT Markets account and start trading now.

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